N.Y. Court Revives|Amazon Sales Tax Suit

(CN) - A New York appeals court reinstated a lawsuit filed by Amazon and other online retailers who say New York can't force them to collect sales tax on purchases by New York customers.

Amazon.com and Overstock.com, two of the world's largest online retail businesses, sued New York last year, claiming a 2008 amendment requiring online retailers to collect New York sales tax violated the Constitution's commerce and equal protection clauses.

Citing the Supreme Court 1992 decision in Quill Corp. v. North Dakota, the companies claimed the tax law was unconstitutional because they do not have a physical presence in the state. Amazon said affiliate referrals in 2007 accounted for only 1.5 percent of its total sales to New Yorkers.

A state judge dismissed the retailers' lawsuit, ruling that New York could legally require them to collect taxes because they use in-state affiliates for marketing and advertising.

In the closely watched appeal, the First Department Appellate Division reinstated the case and sent it back to the lower court to further develop the record.

The court said Amazon and Overstock might be able to prove that the tax amendment is unconstitutional, depending on the strength of their relationship with in-state affiliates.

For the out-of-state companies to collect New York tax, they have to prove that they were not involved in direct solicitation. If the retailers' affiliates in New York were "passive" advertisers, the challenged law may be unconstitutional, the court ruled.

"Clearly, Amazon's program, reasonably, is not designed for the passive advertiser, but seeks growth by reliance upon representatives who will look to solicit business," Justice Eugene Nardelli wrote for the five-justice panel.

"The obligations imposed by the state to collect the tax only arise when the paradigm shifts from advertising to solicitation. Thus, until such time as the out-of-state vendor produces a certification from every one of its New York representatives that they have not engaged in solicitation, the facial challenge based upon the commerce clause must fail."

Though the facial challenges lack merit, the appeals court ruled, "further discovery is necessary before a determination can be rendered as to the as-applied commerce and due process clauses claims."

However, the justices agreed with the trial court that the tax law "does not violate the equal protection clause, either on its face or as applied."

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